McKesson profit falls 10% in Q3

SAN FRANCISCO (CBS.MW) -- McKesson Corp. said Thursday its third-quarter profit fell 10 percent from various charges and the timing of price increases, but its revenue exceeded targets on strong sales in its North American drug distribution business.

The company reported third-quarter net income of $120.2 million, or 41 cents a share, down from $134.3 million, or 46 cents, in the same quarter a year ago. Analysts polled by Thomson First Call expected the San Francisco-based pharmaceuticals distributor to earn 50 cents a share, on average.

Excluding warehouse sales, revenue came to $12.4 billion, ahead of average estimates and up from $10.9 billion a year ago. Analysts expected third-quarter revenue of $12.32 billion.

Shares of McKesson closed Thursday up 1.9 percent to $31.48.

"McKesson continued to have strong revenue growth in the third quarter, driven by U.S. and Canadian pharmaceutical distribution," said John H. Hammergren, chairman and chief executive officer, in a statement.

"While we had several unusual issues in the quarter, which we have now addressed, our earnings are primarily being impacted by the continued evolution of our Pharmaceutical Solutions business model. In response, we are working with manufacturers and customers to ensure that McKesson will be appropriately compensated for the valuable services we provide, and we continue to focus on improvements in our operating efficiency."

Among the factors hurting its third-quarter profit was an estimated $25 million pretax reduction in McKesson's pharmaceutical division due to changes in the timing of drug price increases expected for the third quarter. Now that the price hikes have happened, they will improve fourth quarter results, the company said.

Because of new contracts and renewals, revenue growth for the company's pharmaceutical solutions group should be in the "mid to high teens" in the 2005 fiscal year, Hammergren said.

Operating profit for McKesson's medical-surgical solutions group were up 27 percent to $22.3 million, including a $2 million restructuring charge.

McKesson recently renewed contracts with Caremark, Omnicare and Rite Aid, the company said.

It also recently won a contract worth an annual $3 billion to supply medicine to the Department of Veteran Affairs, a move that rival AmerisourceBergen, which previously held the contract, is protesting.

Shares of the three largest drug distributors -- McKesson, Cardinal Health
CAH, -0.73%
and AmerisourceBergen
ABC, -2.10%
-- have come under pressure in the last month after analysts grew worried the companies would have to lower prices after McKesson lowered it prices to win the bid, which could undermine the industry's pricing power in future deals.

AmerisourceBergen said Tuesday it will file a complaint with the U.S. Court of Federal Claims asking that the contract be overturned and awarded, in whole or in part, to AmerisourceBergen.

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